Home workers and getting the tax returns right

25th May 2015

If you work from home you are entitled to include part of the running costs of your home in your accounts, which will save you some tax. This is of course, good but how do you calculate the right amounts. There are two potential methods for calculating this.

If your business is eligible to use the new simplified accounting method you have two options to work out how much to claim for business use of home.

If your sales are under the VAT threshold, which at the moment is £82,000 a year, and you are a sole trader or in a partnership where all the partners are individuals rather than corporate bodies, you are eligible to use the simplified accounting method, and one option this method allows is a flat rate calculation for business use of home.

The flat rate method

This simply asks you to look at how many hours a month you spend running your business at home on average, and then include a fixed amount in your accounts for business use of home.

The amount varies with the number of hours per month you work at home, as follows:

25-50 hours: £10 per month

51-100 hours: £18 per month

101 hours or more: £26 per month

Using this method is quicker than working out your actual costs, but the figure might not be as high as you think it should be. Therefore you might save time but pay more tax. Please note also that the flat rate method covers only costs for heat, light and power, and telephone and broadband - you will still need to work out how much you can claim for your other costs.

The second method, which is the method you’ll have to use if your business is not eligible to use the simplified accounting method works like this.

Analysing the costs method

If you want to claim part of the actual running costs of your home in your business accounts, then how much you can claim depends on the type of business you have and what work you actually do at home. For example, if you’re a freelance decorator you might spend an hour or two a week writing up your books at home, but spend the rest of your working life at your customers’ properties. But if you are a self-employed PR consultant or web designer, you may well do the vast majority of your work at home and only occasionally visit clients.

HMRC say that you need to apportion the running costs of your home on a “fair and reasonable” basis between the private element of that cost - the part that relates to you actually living there - and the business element.

One method is to work out how many rooms you have in your home, and identify how many of those rooms you use for business - and also calculate how much time you actually use these rooms for business.

HOWEVER, do remember that it’s not a good idea to use any part of your home solely for business activities all the time and never use it for any private activities, because capital gains tax will then be due on the part you use just for business if, and when, you sell your home. Instead, try to make sure that your work space serves a dual purpose

For example if there are 6 rooms in your home. You only use one for business, and 90% of the use of that room is for business. So you would add up all the costs you can claim, and multiply that by 1/6 and then by 90%, to get the accounts figure for the business use of your home.

Costs you can claim

Here are some of the costs you might incur to run a home, which you may then be able to claim part of in your business accounts:

MortgageIf you’re buying your home through a mortgage, you can claim a proportion of the interest only - not the capital repayment.

RentYou can’t charge your business rent when you’re self-employed, because legally you are the business. But if you’re renting your home from a landlord, then you can claim a proportion of the rent for your business.

Council taxYou can claim a proportion of your council tax cost. However, depending on how much you use your home for business, you may have to pay business rates rather than council tax.

Light and heatYou can claim the business proportion of your gas and electricity costs for lighting and heating in the room(s) you use for business.

Telephone and broadbandRemember that what you can claim for your telephone and broadband is not apportioned on the basis of the number of rooms in your home, but on what your actual usage of the line is.

You can claim the full cost of all your business use of the line, and a percentage of the line rental, based on how much you use it for business purposes and how much is for personal use.

Property repairsIf a property repair relates solely to the part that’s used for business, you would include this cost in your accounts in full, subject to the business use of that room.

If the repair is to the whole house, for example a repair to the roof, you can include that in the same proportion as you would the rent or council tax. But if the repair is just for a part of the house that’s not used for business you can’t claim any part of that repair in your business accounts.

WaterIf you use a lot of your home water supply for business - for example if you run a car valeting service - then you would need to apply to the water company for this to be separately charged, and you could claim the full cost.

But if your water use for your work is only minor, you can’t claim any of the cost for your business.

Getting this right can be confusing and that is why we recommend using an accountant – you will same money and most likely a lot of time as well.